Will Dropbox IPO be a Facebook or a Snap?

The new hot-ticket tech IPO has arrived as cloud-storage provider Dropbox – valued at around at $10bn – looks for a $500m initial public offering later this month.

It’s the latest tech ‘unicorn’ – a privately held company worth more than $1bn – to go public, and is set to attract huge interest.

At first sight it seems like a good buy. Dropbox has been around since 2008, when it revolutionised the market, offering 2GB of free cloud storage to anyone and everyone in a reliable, easy-to-use format.

So far it has relied on private equity to fund growth, and has managed to raise more than $600m from backers – but it has yet to make a profit, having lost $112m in the last year financial year.

The problem is, although it has 500 million registered users, just 11 million pay for premium storage services – even in 2018, 2GB is quite a lot of data for individual users.

Google Drive has been eating into the Dropbox user base Photo: Shutterstock

Competition

It has competition, too, in the shape of older rival Box, which launched in 2005. Box has just 44 million registered users, but a greater penetration of the paying corporate market and a higher revenue base.

Other competition, of course, comes in the shape of heavyweights Google, Microsoft and Apple, who are not solely reliant on income from cloud storage. Google Drive gives users 15GB of free storage, while Microsoft’s OneDrive and Apple’s iCloud both offer 5GB before charging kicks in.

In terms of market share on mobile devices, as of March 2017, Dropbox had 47.3%, Google Drive 26.9%, OneDrive 15.3% and Box 10.5%, according to a survey by CloudRAIL.

That may sound like a fairly healthy market share, but compare it with the previous year: Dropbox 63.8%, Google Drive 17.8%, OneDrive 11.6% and Box 6.8%.

So over just a 12-month period, a 25% drop in its user base, while Box showed a 54% increase and Google Drive a 51% increase.

Low conversion rate

However, when it comes to usage as measured by actual app activity, Dropbox scored better in the 2017 survey at 77%, followed by Google Drive on 17.2%, OneDrive on 5.1% and Box on just 0.8%. That’s down on the 80% Dropbox scored in 2016, but still a healthy figure. The trouble is, as we have mentioned, most of them aren’t paying.

“After so many years, the paying customers are only 11 million out of 500 million, the conversion rate is very low,” Santosh Rao, head of research at Manhattan Venture Partners, told MarketWatch.

To add to the uncertainty, Box has already gone public and has just released disappointing 2018 fourth-quarter earnings. Revenue was $136.7m, around the consensus expectation – but its revenue estimate for Q1 2018 was $139m-$140m, well below the expected $144m.

Even allowing for changes in accounting standards that the firm had to make, the estimate would still have been below consensus at $142m-$143m.

These figures have a direct impact on the impending Dropbox IPO, because however much it tries to convince markets its business model is different to Box, they are essentially very similar.

Dropbox has seen good revenue growth Photo: Shutterstock

70% increase in paying users

There are some positives, though. The number of paying users, while low at 11 million compared with its user base, increased by 70% on the 2016 figure of just 6.5 million, and it is now generating around $112 in revenue per paying user.

Last year’s $112m loss last year is also a big improvement on the deficit of $210m in 2016 and $326m in 2015.

There’s been good revenue growth, too, coming in at $1.1bn last year, compared with $845m in 2016 and $604m in 2015.

In a letter to shareholders included in the IPO filing, Dropbox co-founders Drew Houston and Arash Ferdowsi said, “While we’re at scale, we can still move quickly. Imagine if every minute at work were well spent – if we could focus and spend our time on the things that matter. This is the world we want to live in.”

There will inevitably, of course, be comparisons with Snap, which went public last March, and whose share price has yet to regain the heady heights seen at the time of the IPO. It opened way above the official $17 launch price at $27.09 and is now trading at $18.02 (8 March), having hit a low of $11.83 last August.

Like Dropbox, Snap has yet to post a profit, and is burning through investors’ cash at an alarming rate.

The Dropbox IPO has strong comparisons to the Snap IPO last spring Photo: Shutterstock

Snap comparisons

One of the reasons Snap’s earnings have been so poor are the huge stock awards given to key members of the team. Snap gave CEO and co-founder Evan Spiegel shares worth $637m, while days before it went public, the company handed out $100m of stock to chief strategy officer Imran Khan. Other executives also received big stock pay-offs that had to be written down in the accounts.

Dropbox co-founders Drew Houston and Arash Ferdowsi have also received new stock options ahead of the IPO, but nowhere near the scale of Speigel’s pay-off. In addition, the stock will also only be paid in tranches, as and when the share price hits certain pre-determined targets.

The other bone of contention with Snap’s launch was voting rights. Snap issued two share classes – one for public consumption with no voting rights, the other for the founders and their private backers which effectively controlled the company.

Dropbox is also planning a dual-class share structure, but public shares do have some voting rights – one vote per share, while class B shareholders will have 10 votes per share. However, the two founders and the biggest private equity backer, Sequoia Capital, will control more than 50% of the company as a result.

“That’s kind of become standard now with these tech companies,” said Rao. “They want to control the direction of the company. On a strategic sense it makes sense. But in the case of Snap, it was just too much, they had 90% of the voting rights.”

Dropbox has clearly learned from Snap’s mistakes. But will it be a Facebook, or another Snap? Only time will tell.

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